As published on taxnotes.com, Tuesday August 13, 2019.
Most New Zealand employers will be able to legally pay their employees in cryptocurrencies starting September 1, according to an announcement by the Inland Revenue Department (IRD).
In its August technical bulletin, the IRD said employers can compensate employees with “crypto-assets” if the payments are for a fixed amount, form a regular part of the employee’s remuneration, and are for services performed under an employment contract. The crypto-asset must be convertible into a fiat currency and either function like a currency or be pegged to one or more fiat currencies, the IRD said.
The ruling, which remains in effect for three years, does not apply to self-employed taxpayers. Cryptocurrency payments that are subject to a “lock-up period” are also excluded.
Under the ruling, businesses compensating employees with cryptocurrencies will be able to deduct the payments, which are subject to withholding under New Zealand’s "pay as you earn" (PAYE) tax system. The IRD said it is unclear under existing legislation whether employees who regularly receive a part of their normal remuneration in crypto-assets are subject to PAYE or whether the fringe benefits tax (FBT) applies. According to PwC, FBT is payable by employers when a noncash benefit is provided directly or indirectly to an employee as a result of an employment relationship. The value of any fringe benefits provided is not included in an employee’s gross income.
“Broadly, the scheme of the [Income Tax] Act is that consideration in money is subject to PAYE, whereas non-monetary benefits are subject to FBT,” the IRD said in the bulletin. “Crypto-assets are not money in the technical sense (although they share some of the characteristics of money). This might suggest that payments in crypto-assets should be subject to FBT. However, the distinction between monetary and non-monetary payments is not hard and fast.”
The IRD said that while there is uncertainty over the issue, it considers that “the concepts of ‘salary’ and ‘wages’ are wide enough to encompass some regular payments in crypto-assets” that are subject to PAYE. “Because the payments are subject to PAYE, the FBT rules will not apply,” the IRD said.
John Bassett, a tax lawyer at Bell Gully, said there is no law in New Zealand that says all compensation must be paid in legal currency. “Employment arrangements typically are on an individual employer/employee basis,” he said in an email. “Accordingly, there is scope for the parties to agree on this form of remuneration. These parties sometimes agree on other ‘in-kind’ benefits such as a motor vehicle, shares, or housing.”
Terry Baucher, a tax accountant with Baucher Consulting Ltd., said that under the Wages Protection Act 1983, wages are to be paid in money, defined as “any New Zealand coin or New Zealand banknotes, or combination of both, the tender of which in respect of the payment of those wages is legal tender.”
“The Inland Revenue rulings don’t appear to consider this point, but focus more on the convertibility of the crypto-assets into fiat currency, which seems a reasonable point,” Baucher said. “I’m not an employment lawyer, but it seems to me that the employee must agree to being paid in crypto-assets and even then, it’s a possible breach of the Wages Protection Act.”
Baucher said he doubts the payment of salaries with cryptocurrencies will catch on anytime soon. “Not many businesses and their employees have the required expertise and understanding of the implications,” he said.
Baucher said businesses that operate “in the crypto-asset space” will benefit from the ruling because it will free up cash flow. “There is a potential disadvantage if there is a sharp depreciation in the value of the relevant crypto-assets, but I think this is more of a risk for employees,” he said in an email. “Employees will need to be mindful that any gain on sale is likely to be taxable. Inland Revenue at present doesn’t accept crypto-assets for payment, so the employer is still going to have to find ‘real money’ to meet any PAYE income tax obligations.”
Ranjana Gupta, a tax lecturer at Auckland University of Technology, said she expects most employers to continue paying wages and salaries in New Zealand dollars. “Cryptocurrencies are largely unregulated and there is currently no standard terminology used for crypto-assets, which could be interpreted rather broadly,” she said. “In my opinion, the benefit of crypto-assets payment will be only [to] crypto-asset-related industries. It can help circumnavigate expensive cross-border payment expenses.”
Gupta said the ruling provides that when a crypto-asset payment is not denominated in New Zealand dollars and the appropriate valuation cannot be determined from a New Zealand-based exchange, an overseas-based exchange can be used. “As cryptocurrencies are notoriously volatile, fluctuations in prices can be large and rapid, [and] their application will have a number of issues,” she said. “Rates can vary significantly between different exchanges and currencies. Therefore, taxpayers should use a consistent exchange and conversion approach.”
Bassett said that from a tax standpoint, there is not much advantage or disadvantage in paying employees in cryptocurrencies. “One way or other, current tax needs to be paid to the IRD, whether as a form of PAYE withholding or fringe benefit tax,” he said. “The employer/employee would be left to agree which party bears the cost of payment to the IRD. Presumably, it will be the employer in most cases.”
Bassett said crypto-asset remuneration will likely appeal to employees if the currency’s prospects for appreciation are strong. “That appreciation in value may not be taxable for the employee,” he said. “For the employer, this approach may be attractive if it helps reduce the cash needs of the business.”